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Central Bank Communication and the Yield Curve

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  • Vedolin, Andrea
  • Leombroni, Matteo
  • ,
  • Whelan, Paul

Abstract

Using the institutional features of ECB monetary policy announcements, we provide direct evidence for the risk premium channel of central bank communication. We show that on days when the ECB announces its monetary policy almost all of the variation of bond yields is driven by communication. Moreover, while the effect of monetary policy is homogeneous across countries before the European debt crisis, we document dramatic differences post crisis and show that communication shocks drive a wedge between peripheral and core yields. We empirically link the periphery-core wedge to break-up and credit risk premia, and study this channel theoretically through the lens of an equilibrium model in which central bank communication reveals information about the state of the economy.

Suggested Citation

  • Vedolin, Andrea & Leombroni, Matteo & , & Whelan, Paul, 2018. "Central Bank Communication and the Yield Curve," CEPR Discussion Papers 12970, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12970
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    Cited by:

    1. Kroencke, Tim A. & Schmeling, Maik & Schrimpf, Andreas, 2021. "The FOMC Risk Shift," Journal of Monetary Economics, Elsevier, vol. 120(C), pages 21-39.
    2. Möller, Rouven & Reichmann, Doron, 2021. "ECB language and stock returns – A textual analysis of ECB press conferences," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 590-604.
    3. Schmeling, Maik & Wagner, Christian, 2019. "Does Central Bank Tone Move Asset Prices?," CEPR Discussion Papers 13490, C.E.P.R. Discussion Papers.
    4. Hansen, Stephen & McMahon, Michael & Tong, Matthew, 2019. "The long-run information effect of central bank communication," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 185-202.
    5. Neuhierl, Andreas & Weber, Michael, 2019. "Monetary policy communication, policy slope, and the stock market," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 140-155.
    6. Bank for International Settlements, 2019. "Unconventional monetary policy tools: a cross-country analysis," CGFS Papers, Bank for International Settlements, number 63, december.
    7. Barbu, Alexandru & Fricke, Christoph & ,, 2020. "Procyclical Asset Management and Bond Risk Premia," CEPR Discussion Papers 15123, C.E.P.R. Discussion Papers.
    8. Pavel Gertler & Roman Horváth & Júlia Jonášová, 2020. "Central Bank Communication and Financial Market Comovements in the Euro Area," Open Economies Review, Springer, vol. 31(2), pages 257-272, April.
    9. Farinha, Jorge Bento & Vidrago, José, 2021. "The impact of the ECB's asset purchase programme on core and peripheral sovereign yields and its transmission channels," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    10. ter Ellen, Saskia & Jansen, Edvard & Midthjell, Nina Larsson, 2020. "ECB Spillovers and domestic monetary policy effectiveness in small open economies," European Economic Review, Elsevier, vol. 121(C).
    11. Farinha, Jorge Bento & Vidrago, José, 2021. "The impact of the ECB’s asset purchase programme on euro area equities," The Quarterly Review of Economics and Finance, Elsevier, vol. 82(C), pages 270-279.

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    More about this item

    Keywords

    Interest rates; Monetary policy; Central bank communication; Risk premia; Eurozone;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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